Financial Review
Key Financial Results
| Consolidated pro forma results $m |
Year ended 31.12.06 |
Year ended 31.12.05 |
% Change |
|---|---|---|---|
| Revenue | 26,877 | 17,199 | 56% |
| EBITDA* | 10,441 | 5,843 | 79% |
| EBIT* | 8,340 | 3,932 | 112% |
| Attributable profit | 4,885 | 2,232 | 119% |
| Earnings per share (basic, pre-exceptionals)*** | $5.13 | $2.52 | 104% |
| Cash generated from operations | 9,370 | 4,667 | 101% |
| Net debt to net debt plus equity (%)** | 41% | 24% | 71% |
| Net assets** | 19,722 | 8,137 | 142% |
| Net assets per share** | 20.82 | 13.57 | 53% |
| Dividends per share: | |||
| – interim dividend (paid) | 11.6¢† | 8.1¢‡ | 43% |
| – final dividend (proposed) | 30.0¢ | 22.4¢‡ | 34% |
| *Excludes exceptional items | |||
| **Assets and debt relate to the statutory balance sheets at year end | |||
| ***Pro forma weighted average number of shares of 864.15 million and 925.41 million have been calculated as if the share issues in 2006 had been made on 1 January 2005 and 1 January 2006 respectively | |||
| 2006 interim dividend paid was 13¢ per share: adjusted to 11.6¢ for rights issue impact | |||
| ‡2005 dividends have been adjusted for rights issue impact | |||
Basis of presentation of financial information
Financial information is presented in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union. The reporting currency of Xstrata plc is US dollars. Financial statements of subsidiaries are maintained in their functional currencies and converted to US dollars on consolidation of Group results.
Unless indicated to the contrary, revenue, earnings before interest, taxation, depreciation and amortisation (EBITDA) and earnings before interest and taxation (EBIT) are reported in the Chief Executive’s Report and the Operating and Financial Review before exceptional items. All commentary in the Business Review, except where otherwise stated, refers to pro forma results for 2005 and for 2006, including the acquisitions of Falconbridge Limited, the Tintaya operation and a one-third interest in the Cerrejón coal operation from 1 January 2005 and 2006 respectively. This provides a more meaningful illustration of the scale and performance of the enlarged group after the acquisitions. A reconciliation of the pro forma to statutory results is set out in the supplementary information. A summary of statutory results and commentary relating to these results is provided below. Exceptional items are significant items of income and expense which, due to their nature or expected infrequency, are presented separately in the income statement. All dollar and cent figures provided refer to US dollars and cents.
| Consolidated statutory operational results $m |
Year ended 31.12.06 |
Year ended 31.12.05 |
|---|---|---|
| Alloys | 959 | 1,116 |
| Aluminium | 530 | – |
| Coal | 3,617 | 3,400 |
| Copper | 7,007 | 2,008 |
| Nickel | 1,678 | – |
| Zinc | 3,721 | 1,449 |
| Technology | 120 | 77 |
| Total Group Revenue | 17,632 | 8,050 |
| Attributable Total Group Revenue | 16,680 | 7,228 |
| Alloys | 263 | 350 |
| Aluminium | 123 | – |
| Coal | 1,249 | 1,346 |
| Copper | 3,349 | 1,131 |
| Nickel | 788 | – |
| Zinc | 1,479 | 303 |
| Technology | 26 | 14 |
| Share of earnings from Falconbridge | – | 21 |
| Corporate and unallocated | (170) | (62) |
| Total Group EBITDA | 7,107 | 3,103 |
| Attributable Total Group EBITDA | 6,480 | 2,715 |
| Alloys | 234 | 317 |
| Aluminium | 98 | – |
| Coal | 892 | 1,079 |
| Copper | 2,850 | 920 |
| Nickel | 614 | – |
| Zinc | 1,329 | 239 |
| Technology | 22 | 10 |
| Share of earnings from Falconbridge | – | 21 |
| Corporate and unallocated | (176) | (66) |
| Total Group EBIT | 5,863 | 2,520 |
| Attributable Total Group EBIT | 5,298 | 2,200 |
The acquisitions completed in 2006 have been consolidated in the IFRS statutory income statement from their respective dates of acquisition, as below:
| Cerrejón coal (one-third interest) | 20-Apr-06 |
| Tintaya copper operation | 21-Jun-06 |
| Falconbridge Limited | 15-Aug-06 |
Statutory Group turnover for the year ended 31 December 2006 increased from $8,050 million to $17,632 million, as average commodity prices continued to rise year-on-year across Xstrata’s portfolio, in particular for base metals and as a consequence of the acquisitions made.
Statutory Group EBITDA for the year ended 31 December 2006 increased by 129% to $7,107 million. The positive impact of the acquisitions and higher LME metals prices more than offset the cost pressures being experienced across the mining industry.
Statutory Group EBIT for the year ended 31 December 2006 increased from $2,520 million to $5,863 million, or by 133%.
The acquisition of Falconbridge was completed through two transactions. Xstrata acquired 20% of Falconbridge at C$28 per share in August 2005, before acquiring the remaining 80% in 2006 at a price of C$62.50 per share. The average price paid per share was C$56.44. Xstrata’s ability to average the purchase price paid for the second tranche of shares over the full purchase provided Xstrata with a compelling competitive advantage and was a significant factor in the success of the transaction.
| Consolidated pro forma operational results $m |
Year ended 31.12.06 |
Year ended 31.12.05 |
|---|---|---|
| Alloys | 959 | 1,116 |
| Aluminium | 1,395 | 1,080 |
| Coal | 3,757 | 3,841 |
| Copper | 12,508 | 6,927 |
| Nickel | 3,364 | 2,161 |
| Zinc | 4,774 | 1,997 |
| Technology | 120 | 77 |
| Total Group Revenue | 26,877 | 17,199 |
| Attributable Total Group Revenue | 25,924 | 16,377 |
| Alloys | 263 | 350 |
| Aluminium | 286 | 158 |
| Coal | 1,320 | 1,588 |
| Copper | 5,399 | 2,697 |
| Nickel | 1,386 | 721 |
| Zinc | 1,946 | 398 |
| Technology | 26 | 14 |
| Corporate and unallocated | (185) | (83) |
| Total Group EBITDA | 10,441 | 5,843 |
| Attributable Total Group EBITDA | 9,814 | 5,455 |
| Alloys | 234 | 317 |
| Aluminium | 208 | 75 |
| Coal | 937 | 1,256 |
| Copper | 4,528 | 1,852 |
| Nickel | 931 | 333 |
| Zinc | 1,673 | 186 |
| Technology | 22 | 10 |
| Corporate and unallocated | (193) | (97) |
| Total Group EBIT | 8,340 | 3,932 |
| Attributable Total Group EBIT | 7,773 | 3,612 |
Under IFRS, this advantage cannot be recognised, as goodwill is calculated separately for each transaction, regardless of the average price paid per share to acquire the 100% interest. This accounting treatment has resulted in the creation of significant additional goodwill of $1.5 billion. Xstrata has completed a detailed fair value evaluation of the assets acquired and, in accordance with IFRS, tested the goodwill for impairment. As a result, the company has determined that an impairment charge of $1,378 million to the 2006 statutory income statement is appropriate in the light of the IFRS valuation of the assets. The impairment has no impact on the 2006 pro forma accounts.
Revenues in 2006 rose by 56% to $27 billion, predominantly due to the positive impact of sustained, stronger commodity prices, particularly in exchange-traded metals. EBITDA increased by 79% to $10,441 million and EBIT more than doubled to $8,340 million.
EBIT variances shown below have been calculated on the basis of a comparison between the statutory 2005 earnings and pro forma 2006 earnings for the former Xstrata Group. To enable a meaningful evaluation of the performance of the former Xstrata Group, the contribution to pro forma earnings of the Falconbridge, Tintaya and Cerrejón acquisitions is included as one line. These acquisitions contributed a total of $4,623 million to pro forma 2006 EBIT.
Higher received sales prices for the majority of Xstrata’s commodities, in particular for copper and zinc, together with the impact of a stronger US dollar compared to local currencies, contributed $1,798 million to EBIT. Higher volumes were achieved at Xstrata’s Australian coal operations, in particular from the coking coal operations and the Rolleston thermal coal mine which was officially opened in 2006. However, these were more than offset by lower volumes from the north Queensland copper assets due to lower head grades, and lower recoveries from the Mount Isa zinc-lead concentrator due to the transition to processing lower grade ores from the Black Star mine.
Continued robust demand and shortages for key inputs including raw materials and mining equipment, together with increased competition for skilled labour have again resulted in extraordinary increases in mining industry input prices, far in advance of CPI inflation. As set out in the 2006 interim report, Xstrata’s commodity businesses have calculated the extraordinary impact of inflation on input prices specific to the mining industry, using third party indices.
Based on these calculations, mining inflation increased Group operating costs by $112 million, over and above CPI inflation of $162 million in 2006, compared to the same period in 2005. Stripping out the impact of CPI inflation and extraordinary price increases specific to the mining sector, Xstrata’s businesses (excluding the acquisitions made in 2006) achieved real cost savings of $56 million in 2006, in a very challenging environment.
| EBIT Variances $m |
Total |
|---|---|
| EBIT 2005 statutory | 2,520 |
| Sales price* | 1,730 |
| Volumes | (138) |
| Unit cost – real | 56 |
| Unit cost – CPI inflation | (162) |
| Unit cost – foreign exchange | 113 |
| Unit cost – mining inflation | (112) |
| Foreign currency hedging | (45) |
| Other income and expenses | (179) |
| Depreciation and amortisation (excluding foreign exchange) | (66) |
| Acquisitions | 4,623 |
| EBIT 2006 pro forma | 8,340 |
| *Net of commodity price linked costs, treatment and refining charges | |
Other income and expenses include significantly increased share option costs under IFRS due to the increase in Xstrata’s share price, which rose by 109% in 2006 on a post rights issue adjusted basis. In addition, EBIT in 2006 was impacted by the absence of $21 million of equity-accounted income from Xstrata’s 20% share in Falconbridge and the absence of gains on sales of assets included in the prior year.
| Average commodity prices |
Unit |
Average price 2006 |
Average price 2005 |
% change |
|---|---|---|---|---|
| Australian FOB export coking* | $/t | 111.2 | 111.5 | (0.3) |
| Australian FOB export semi-soft coking* | $/t | 68 | 70.3 | (3.3) |
| Australian FOB export thermal coal* | $/t | 46.4 | 51.2 | (9.4) |
| Colombian FOB export thermal coal* | $/t | 49.3 | – | – |
| South African export thermal coal* | $/t | 45.8 | 48.5 | (5.6) |
| Aluminium (LME cash average) | $/t | 2,570 | 1,898 | 35.4 |
| Copper (LME cash average) | $/t | 6,740 | 3,684 | 83 |
| Lead (LME cash average) | $/t | 1,286 | 976 | 31.8 |
| Zinc (LME cash average) | $/t | 3,264 | 1,382 | 136.2 |
| Nickel (LME cash average) | $/t | 24,155 | 14,747 | 63.8 |
| Ferrochrome (Metal Bulletin) | ¢/lb | 71.6 | 73 | (1.9) |
| Ferrovanadium (Metal Bulletin) | $/kg | 38.5 | 70.5 | (45.4) |
| *Average received price | ||||
In 2006, base metals prices were considerably stronger than in 2005. Copper prices reached a high of $8,800 per tonne in May 2006 and remained strong throughout the year. Nickel prices repeatedly reached new historical highs due to strong demand and critically low stocks, and this trend has continued into 2007. Zinc prices also significantly outstripped the previous year’s averages, increasing in the second half of the year as stocks fell and demand remained strong. Received export thermal coal prices were marginally lower than the prior year, but remained well above long run average prices and have rebounded strongly in early 2007. Coking coal prices remained at a similar level to 2005, albeit with greater price differential between high quality hard coking coal, such as Xstrata’s Oaky Creek product, and lower grade semi-soft coal. Average ferrochrome prices were lower year-on-year, but robust demand for stainless steel from the second quarter supported price increases throughout the year, with ferrochrome prices ending 2006 at 78¢ per pound. Whilst ferrovanadium prices dropped substantially from their peaks of early 2005, prices remain above historical levels.
| Currency Table to $ (USD) | Average 2006 | Average 2005 | % change (+/-) | At 31.12.06 | At 31.12.05 |
|---|---|---|---|---|---|
| USD:ARS | 3.07 | 2.92 | (5) | 3.06 | 3.03 |
| AUD:USD | 0.75 | 0.76 | (1) | 0.79 | 0.73 |
| USD:CAD | 1.13 | 1.21 | (7) | 1.17 | 1.16 |
| USD:CHF | 1.25 | 1.25 | – | 1.22 | 1.31 |
| EUR:USD | 1.26 | 1.24 | 2 | 1.32 | 1.18 |
| GBP:USD | 1.84 | 1.82 | 1 | 1.96 | 1.72 |
| USD:ZAR | 6.77 | 6.37 | (6) | 7 | 6.33 |
The stronger US dollar against most of the local currencies in Xstrata’s operating regions during 2006 gave rise to a favourable variance to EBIT of $113 million, offset partially by the impact of Australian dollar hedging in respect of contracted coal sales which reduced by $45 million compared to the prior period. The greatest impact of the stronger US dollar was seen in South Africa, where the average South African rand exchange rate was 6% weaker against the US dollar compared to 2005.
| Earnings Summary $m |
Pro forma year ended 31.12.06 |
Pro forma year ended 31.12.05 |
|---|---|---|
| EBIT | 8,340 | 3,932 |
| Net interest (excluding loan issue costs written-off and realised net foreign currency translation gains) | (1,055) | (797) |
| Income tax expense | (2,127) | (733) |
| Minority interests | (413) | (226) |
| Attributable profit (before exceptionals) | 4,745 | 2,176 |
| Earnings per share (before exceptionals)* | 513¢ | 252¢ |
| WMC offer costs | – | (10) |
| Loan issue costs written-off | (9) | (17) |
| Gains and losses on foreign currency loans and net recycled gains/(losses) from foreign currency translation reserve | 75 | 62 |
| Income tax on exceptionals | (5) | 8 |
| Profit on sale of investments and operations | 79 | 13 |
| 140 | 56 | |
| Attributable profit | 4,885 | 2,232 |
| Earnings per share* | 528¢ | 258¢ |
| *Calculated using shares in issue on 31.12.06 | ||
The effective tax rate for the period was 29% compared to 23% for the year ended 31 December 2005 due to increased earnings in higher tax jurisdictions and benefits from the change of tax rates in 2005. Minority interests rose steeply due to increased profitability at Alumbrera during the period.
Statutory net interest before exceptional items increased from $92 million to $534 million, reflecting the higher levels of borrowings as a result of the Falconbridge acquisition.
The statutory tax charge before exceptional items of $1,574 million represents an effective rate of 29% against 23% for 2005.
The increase in 2006 is mainly due to the higher effective tax rates of the acquired Falconbridge operations and increased profitability in higher rate tax jurisdictions.
Statutory attributable profit before exceptional items doubled, increasing by $1,690 million to $3,350 million.
Community bakery training course, Challhuahuacho, Las Bambas exploration project
Operator cleaning the boiler at Nordenham zinc smelter, Germany
| EBIT sensitivities $m |
Impact on 2007 EBIT* |
Indicative full year EBIT** |
|---|---|---|
| 1¢/lb movement in ferrochrome price | 11 | 11 |
| $1/kg movement in ferrovanadium price | 3 | 3 |
| $1/tonne movement in Australian thermal export FOB coal price | 16 | 35 |
| $1/tonne movement in Australian coking export FOB coal price | 3 | 6 |
| $1/tonne movement in Colombian export thermal FOB coal price† | – | – |
| $1/tonne movement in South African export thermal FOB coal price | 5 | 14 |
| 1¢/lb movement in aluminium price | 5 | 5 |
| 1¢/lb movement in copper price | 21 | 21 |
| $10/oz movement in gold price | 17 | 17 |
| $1/lb movement in nickel price | 132 | 132 |
| $1/lb movement in ferronickel price | 62 | 62 |
| 1¢/lb movement in zinc price | 21 | 21 |
| $100/tonne movement in zinc treatment charge price | 6 | 19 |
| 1¢/lb movement in lead price | 7 | 7 |
| 10% movement ARS | 7 | 7 |
| 10% movement AUD | 292 | 301 |
| 10% movement CAD | 144 | 144 |
| 10% movement EUR | 30 | 30 |
| 10% movement GBP | 1 | 1 |
| 10% movement ZAR | 132 | 132 |
| *After impact of currency and commodity hedging, and contracted, priced sales as at 31 December 2006 | ||
| **Assuming current annualised production and sales profiles, no currency or commodity hedging and no contracted, priced sales and purchases at 31 December 2006 | ||
| †Not available due to confidentiality provisions within shareholder agreements | ||
| Cash flow, net debt and financing summary $m |
Pro forma year ended 31.12.06 |
Statutory year ended 31.12.05 |
|---|---|---|
| EBITDA | 10,441 | 3,103 |
| Share of results from associates | (11) | (23) |
| Increase in inventories | (811) | (125) |
| Increase in trade and other receivables | (633) | (334) |
| Increase in deferred stripping and other assets | (154) | (80) |
| Increase in trade and other payables | 534 | 236 |
| Movement in provisions and other non-cash items | 4 | 3 |
| Cash generated from operations | 9,370 | 2,780 |
| Net interest paid | (965) | (92) |
| Dividends received | 2 | 17 |
| Tax paid | (1,486) | (380) |
| Cash flow before capital expenditure | 6,921 | 2,325 |
| Sustaining capital expenditure | (893) | (412) |
| Disposals of fixed assets | 32 | 11 |
| Free cash flow | 6,060 | 1,924 |
| Expansionary capital expenditure | (1,163) | (455) |
| Cash flow before acquisitions | 4,897 | 1,469 |
| Purchase and sale of investments | (3) | (1,472) |
| Purchase of subsidiaries net of cash acquired | (17,078) | (60) |
| Purchase of Cerrejón | (1,715) | – |
| Sale of operations, net of cash disposed | 24 | 25 |
| Net cash flow before financing | (13,875) | (38) |
| Purchase of own shares | (11) | (522) |
| Sale and issue of own shares | 7,871 | 25 |
| Equity dividends paid | (496) | (154) |
| Dividends paid to minority interests | (202) | (148) |
| Redemption of minority interests | (95) | – |
| Debt (acquired)/disposed of with operations | (4,642) | 7 |
| Issue of convertible debenture | – | (375) |
| Redemption of convertible debenture | 359 | – |
| Convertible bond IAS 32/39 movements | – | 120 |
| Other non-cash movements | 101 | (54) |
| Movement in net debt | (10,990) | (1,139) |
| Net debt at the start of the year | (2,611) | (1,472) |
| Net debt at the end of the period* | (13,601) | (2,611) |
| *Includes 100% of Alumbrera cash and third party shareholder loans | ||
Dragline at ATCOM colliery, South Africa
The cash flow statement above compares statutory 2005 with pro forma 2006 cash movement, including the acquisitions of Falconbridge, Cerrejón and Tintaya from 1 January 2006, to provide a basis for comparison between the prior year and 2006 performance.
On a pro forma basis, the Group generated $9.4 billion of operating cash flow during the period. After funding sustaining capital expenditure of $893 million, the operations generated some $6 billion of free cash flow. On a statutory basis, cash generated from operations increased by 141% from $2.8 billion to $6.7 billion.
During the period, $386 million of Xstrata’s convertible debentures were converted to equity. As at 5 March 2007, less than $15 million of convertible debentures remained outstanding.
Acquisitions
In the first half of 2006, Xstrata made two major acquisitions at a total value of $2.5 billion. On 20 April, the Xstrata coal business acquired a one third share of the Cerrejón thermal coal business for $1.7 billion. The acquisition of the Tintaya copper mine in Peru was completed on 21 June 2006 at a cost of $811 million, net of cash acquired.
In the second half of 2006, Xstrata acquired the remaining 80% of Falconbridge it did not already own, at a cost of $17.1 billion.
Xstrata assumed control of Falconbridge on 15 August and completed the purchase of the remaining outstanding shares on 1 November 2006. The purchase of a 20% stake in August 2005 for $1.7 billion brought the total acquisition cost to $18.8 billion or C$56.44 per share. This acquisition has transformed Xstrata, bringing with it a suite of organic growth opportunities, diversification into nickel and aluminium, exposure to North America and a significantly enhanced South American copper business, together with additional scale for the zinc business, now the largest listed producer globally.
Funding and Capital Structure
Xstrata was transformed in 2006. During the year the Group financed three major acquisitions at a total cost of $19.6 billion. These acquisitions were financed through a combination of operational cash flows, debt and issued equity, maintaining Xstrata’s investment grade credit rating throughout.
On 17 May 2006, the day that Xstrata announced its offer for Falconbridge, Xstrata placed 62 million shares in the market at a price of £21.00 per share, raising $2.5 billion – slightly in excess of the combined purchase price for the acquisitions of Cerrejón and Tintaya that were concluded earlier in the period. The placement comprised 32.5 million new shares and 29.5 million shares that were previously held by Batiss Investments under Xstrata’s Equity Capital Management Programme. The shares held by Batiss had been acquired over time in the market at an average price of £10.72 per share, resulting in a gain of $549 million, recognised directly in equity.
The Group’s subsequent acquisition of Falconbridge in August 2006 was funded through a $19 billion financing package. This package was split equally between acquisition debt of $9.5 billion and bridging facilities of $9.5 billion.
The acquisition further enhanced the Group’s risk profile through increased diversification by commodity, currency and geographic spread, together with increased scale and an exceptional suite of cash generative assets. Xstrata’s existing credit rating of BBB+ (stable) was reaffirmed by Standard & Poor’s following completion of the transaction and Moody’s commenced coverage of the group with a Baa2 (stable) rating, confirming Xstrata’s investment grade balance sheet and strong financial outlook.
In October, a successful equity rights issue was completed to raise $5.5 billion, with the proceeds used to repay a portion of the $9.5 billion bridging facilities put in place at the time of the acquisition. The balance of these facilities was repaid prior to year end, through strong free operating cash flow from operations, together with the proceeds of an inaugural US global bond offering, which was heavily oversubscribed and raised $2.25 billion in November 2006.
Total equity issuance during the year of $8 billion underlines Xstrata’s commitment to maintain an investment grade credit rating through a conservative capital structure. Despite undertaking three large acquisitions, funding all capital expenditure programmes and increasing dividend distributions, the Group remains well positioned to take advantage of its many internal growth options and to pursue value-adding external growth opportunities as they arise.
From a pro forma net debt position at 30 June 2006 of $16.1 billion, Xstrata’s robust free cash flow generation has enabled net debt to decrease to $13.6 billion at year end. Net debt to equity (calculated as net debt to net debt plus equity) has correspondingly decreased from 47% to 41% over the same period.
Net debt summary
The net indebtedness figures and working capital tables below are shown on a statutory basis. The debt position at 31 December 2005 is therefore that of the Group excluding the Falconbridge operations. The debt figures for 31 December 2006 include the impact of additional debt raising for the purchase of Falconbridge, net of substantial debt repayments from strong cash generation in 2006.
| Net debt summary $m |
As at 31.12.06 |
As at 31.12.05 |
|---|---|---|
| Cash (excluding overdrafts) | 1,860 | 524 |
| External borrowings | (15,303) | (2,917) |
| Arrangement fees | 84 | 11 |
| Finance leases | (242) | (229) |
| Net debt* | (13,601) | (2,611) |
| Net debt to net debt plus equity | 40.80% | 24.30% |
| By currency: | ||
| AUD | (108) | 35 |
| CAD | (435) | – |
| EUR | 10 | 8 |
| GBP | 12 | 10 |
| USD | (12,984) | (2,664) |
| ZAR | (109) | (4) |
| Other | 13 | 4 |
| Net debt by currency | (13,601) | (2,611) |
| *Includes 100% of Alumbrera cash | ||
| Working capital $m |
As at 31.12.06 |
As at 31.12.05 |
|---|---|---|
| Inventories | 3,540 | 891 |
| Trade and other receivables | 2,826 | 1,138 |
| Prepayments | 204 | 99 |
| Trade and other payables | (3,110) | (946) |
| Net working capital | 3,460 | 1,182 |
The differences between the working capital balances above and the movements shown in the EBITDA cash flow reconciliation reflect non-cash items such as movements in exchange rates and non-current assets, including deferred stripping.
The three major acquisitions resulted in a material increase in trade receivables, inventories and trade payables. Trade receivables increased further as metals sales prices rallied over the period. Inventories on hand at year end were also higher due to the higher cost of European smelter feedstock.
Treasury Management and Financial Instruments
The Group is generally exposed to US dollars through its revenue stream. The Group will seek to source debt capital in US dollars directly or by borrowing in other currencies and swapping them into US dollars, thus matching the negative exposure of debt service obligations against the positive exposure of revenue.
Currency Hedging
Currency cash flow hedging may be used to reduce the Group’s short-term exposure to fluctuations in the local currency exchange rates to the US dollar, Sterling and Euro. Net currency hedging gains amounted to less than $1 million in the income statement for the period ended 31 December 2006, compared to gains of $45 million for the corresponding period in 2005. The unrealised mark-to-market gain for currency hedging maturing in 2007 as at 31 December 2006 was $7 million. Australian dollar hedging is applied in respect of US dollar priced coal sales.
| Foreign currency forward contracts impacting 2007 earnings Currencies |
Forward sale $m 31.12.06 |
Weighted average exchange rate |
Fair value $m 31.12.05 |
|---|---|---|---|
| Maturing 2007 | |||
| $ to AUD | 143 | 0.755 | 6 |
| $ to CAD | 4 | 1.529 | 1 |
| $ to JPY | 9 | 108.38 | (1) |
| EUR to ZAR | 3 | 7.9685 | 0 |
| $ to EUR | 19 | 1.3125 | 0 |
| Total | 178 | 6 |
Commodity Hedging
Cash flow hedges relating to sales in 2007 are shown in the table below. The fair value of these hedges is deferred within equity on the balance sheet until the sale is recorded. The unrealised mark-to-market loss on commodity hedging maturing in 2007 at 31 December 2006 was $54 million, based on the forward curve at that date.
No new hedging contracts were entered into for base metals during 2006.
| Commodity forward and option contracts impacting 2007 earnings |
Commodity |
Volume |
Average price $ |
Fair value $m 31.12.06 |
|---|---|---|---|---|
| Thermal coal (tonnes) | $ Coal | 5,185,000 | 53.5 | (12) |
| Gold (ounces) | AUD Gold | 88,500 | 559.62 | (7) |
| Gold forwards (ounces) | $ Gold | 104,166 | 386.3 | (27) |
| Gold collars (ounces) | $ Gold | 102,000 | 500-595 | (8) |
| Total | (54) | |||
| *The average price is stated in US dollars and where necessary has been converted from foreign currencies at period end exchange rates | ||||
Construction of the new Nickel Rim South project in Sudbury, Canada
Interest Rate Hedging
The Group normally borrows and invests at floating rates of interest and will generally swap any fixed rate exposure into floating interest rates. A limited amount of fixed rate hedging may be undertaken during periods where the Group’s exposure to movements in short-term interest rates is more significant. The unrealised mark-to-market loss on interest rate hedging in place at 31 December 2006 was $16 million.
| Interest rate swaps |
Principal $m |
Average rate % |
Fair value $m 31.12.06 |
|---|---|---|---|
| Interest rate swapped from US$ fixed rates | |||
| Maturing between 1 to 2 years | 111 | 8.48 | 6 |
| Maturing between 3 to 4 years | 600 | 4.50 | (11) |
| Maturing between 4 to 5 years | 1,050 | 5.69 | (1) |
| Maturing greater than 5 years | 1,750 | 6.30 | (12) |
| Interest rate swapped to US$ fixed rates | |||
| Maturing between 1 to 2 years | 25 | 5.00 | – |
| Maturing greater than 5 years | 100 | 4.54 | 2 |
| 3,636 | 5.84 | (16) |
| Capital expenditure summary (excludes deferred stripping expenditure) $m |
Pro forma year ended 31.12.06 |
Pro forma year ended 31.12.05 |
|---|---|---|
| Alloys | 40 | 35 |
| Aluminium | 33 | 42 |
| Coal | 235 | 226 |
| Copper | 257 | 246 |
| Nickel | 162 | 162 |
| Zinc | 114 | 94 |
| Technology | 1 | 1 |
| Unallocated | 5 | 5 |
| Total Sustaining | 847 | 811 |
| Attributable Sustaining | 826 | 797 |
| Alloys | 220 | 168 |
| Aluminium | 22 | 14 |
| Coal | 295 | 292 |
| Copper | 257 | 178 |
| Nickel | 210 | 205 |
| Zinc | 158 | 47 |
| Technology | 1 | – |
| Unallocated | – | 33 |
| Total Expansionary | 1,163 | 937 |
| Attributable Expansionary | 1,149 | 932 |
| Alloys | 260 | 203 |
| Aluminium | 55 | 56 |
| Coal | 530 | 518 |
| Copper | 514 | 424 |
| Nickel | 372 | 367 |
| Zinc | 272 | 141 |
| Technology | 2 | 1 |
| Unallocated | 5 | 38 |
| Total | 2,010 | 1,748 |
| Attributable total | 1,975 | 1,729 |
Expansionary capital expenditure increased in 2006, exceeding $1.1 billion on a pro forma basis as investments were made in a number of growth projects.
Expansionary capital expenditure for Xstrata on a standalone basis (excluding Falconbridge) rose to $485 million, broadly in line with the guidance given last year of approximately $500 million. Major items of expansionary capital expenditure included the Project Lion ferrochrome smelter in South Africa, continued development of the Mototolo PGM project (a joint venture with Anglo Platinum and Kagiso Trust Investments), Goedgevonden thermal coal, ongoing expansions to the copper smelter and zinc-lead concentrator at Mount Isa, a new coal wash plant at Collinsville coal mine and the acquisition of a further dragline at the Rolleston operation in Queensland.
The acquisition of Falconbridge brought with it a significant number of high quality projects undergoing development or feasibility studies.
In 2006, expenditure on expansionary nickel projects was in excess of $200 million. Funds were invested in the further development of the Nickel Rim South Project in Sudbury, which is scheduled to commence production in 2009, the renewal project underway at the Koniambo deposit in New Caledonia and an expanded drilling programme at the Kabanga project in Tanzania. Investment in former Falconbridge copper expansionary projects rose to over $173 million in 2006. Major items of expenditure included the completion of the Kidd Mine D expansion in Canada and further development of a number of growth projects including El Pachón, El Morro and Frieda River.
Dividends
The Directors have proposed a 2006 final dividend of 30¢ per share, amounting to $281 million. On a rights issue-adjusted basis, which takes into account the bonus element of the discounted rights issue, this amounts to a full year dividend of 41.6¢ per share, a 37% increase on the comparable 2005 rights issue-adjusted figure. The final dividend will be paid on 18 May to shareholders on the register at 27 April 2007.
| Dividend dates | 2007 |
|---|---|
| Ex-dividend date | 25-Apr |
| Deadline for return of currency election forms | 27-Apr |
| Record date | 27-Apr |
| AGM | 8-May |
| Applicable exchange rate date | 11-May |
| Payment date | 18-May |
As Xstrata plc is a Swiss tax resident company, the dividend payment will be taxed at source in Switzerland at the rate of 35%. A full or partial refund of this tax may be available in certain circumstances.
The final dividend is declared and will be paid in US dollars. Shareholders may elect to receive this dividend in Sterling, Euros or Swiss francs. The Sterling, Euro or Swiss francs amount payable will be determined by reference to the exchange rates applicable to the US dollar seven days prior to the dividend payment date. Dividends can be paid directly into a UK bank or building society account to shareholders who elect for their dividend to be paid in Sterling.
Operator cleaning the boiler at Nordenham zinc smelter, Germany
Lydenburg ferrochrome smelter, South Africa
Further details regarding tax refunds on dividend payment, together with currency election and dividend mandate forms, are available from the investor relations section of Xstrata’s website (www.xstrata.com) or from the Company’s Registrars.
Share Data
Under IFRS, own shares (treasury stock) are deducted from the total issued share capital when calculating earnings per share. During the period, 2.5 million shares were sold in the market and 3 million shares were issued relating to the disposal of Xstrata equity allotted to an Employee Share Ownership Trust, (an employees’ share scheme as that term is defined for the purposes of the Companies Act 1985 and within the provisions), to service the exercise of employee share options.
| Share price |
XTA LSE (GBP) |
XTA SWX (CHF) |
|---|---|---|
| Closing price 31.12.05 | 13.6 | 30.75 |
| Closing price 31.12.06* | 25.5 | 61.2 |
| Period high | 25.7 | 62 |
| Period low | 12.19 | 27.75 |
| Period average | 18.82 | 43.58 |
| *Share price adjusted for rights issue in October 2006 | ||
| Shares in issue for statutory EPS calculations |
Number of shares (000) |
|---|---|
| 2006 | |
| Weighted average for year ended 31.12.06 used for statutory eps calculation | 771,820 |
| 2005 | |
| Weighted average for year ended 31.12.05 used for statutory eps calculation | 684,196 |
| Total issued share capital as at 31.12.06 | 943,150 |
Equity Capital Management Programme
Under the equity capital management programme (ECMP), up to 10% of the issued capital of Xstrata plc can be purchased in the market by Batiss Investments, a Guernsey-registered entity owned by a trust and legally independent of the Xstrata Group. During the first half, 29.5 million shares held by the trust were sold at an average price of £21.00 per share with the gain of $549 million taken directly to the Group’s reserves. No shares were purchased under the ECMP during the period, and no shares are held in the trust at 31 December 2006.
| Publicly disclosed major shareholders Name of shareholder | Number of ordinary shares of $0.50 each | % of ordinary issued share capital |
|---|---|---|
| Glencore International AG | 336,801,333 | 34.7 |
| The Capital Management Arrangement between Glencore and Credit Suisse Group, which was entered into in connection with the Xstrata Group’s acquisition of MIM Holdings Limited and the associated rights issue in 2003, was terminated on 20 December 2006. | ||
Community bakery training course, Challhuahuacho, Las Bambas exploration project